Abstract
Contingent contracts for university faculty, based on output or investment, are not possible since neither output nor investment are verifiable. Further, the accumulation of discipline-specific human capital by academics is often detrimental to their opportunities outside their occupations. We have shown in this paper that the confluence of these effects results in a lifetime employment contract. Universities prefer it because it encourages increased levels of investment. Faculty members prefer it since it prevents employers from taking advantage of the erosion of their outside opportunities as they strive for results in their discipline.
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Notes
- 1.
Federal judges in the US and civil servants in several countries are appointed for life, presumably so that they can pursue their duties free of any outside pressure. In addition, public school teachers in the United States are granted tenure, and it is very difficult to dismiss employees in many settings, even though they do not have formal tenure.
- 2.
See Rosovsky 1990, p. 178, footnote 3.
- 3.
In fact, Hart (1995, p. 38) mentions the university tenure decision as an example where performance could be observable but not verifiable in court.
- 4.
The terms are offered after the contract; thus each university can react to the other’s choice of contract
- 5.
Building on the “General Declaration of Principles” from 1915, “The Report of Committee A on Academic Freedom and Academic Tenure”, AAUP Bulletin, 1918, notes the following. “It should be remembered, too, that the College or University professor is a specialist. The market for his services is limited. In any one year, or series of years even, there may be no positions available in which his special training and interests could be utilized.”
- 6.
Each university has one slot (position), but can create an additional one at a small cost.
- 7.
“By far the most dependable indicator of university status is the faculty’s degree of excellence that determines everything else; a good faculty will attract good students, grants, alumni and public support, and national and international recognition. The most effective method to maintain or increase reputation is to improve faculty quality. … The move of a professorial superstar from one institution to another can result in instant recognition.” [Rosovsky 1990, pp. 229–231]. This well known fact is the justification for our objective of maximizing average payoff. This objective, within our model, implies that bidding will occur for only the highest achievers and those with most potential for success.
- 8.
This formulation is, of course, a simplification. An alternative formulation is as follows. Let η represent investment in “industry” and let α(η) be a strictly concave, increasing, twice differentiable function of η. Let the cost of investment be given by the strictly convex, twice differentiable function c(. ) of investment. In industry, an employee will choose η to maximize α(η) − c(η). Let the maximizing η be η ∗ and the value of α(η ∗ ) be α (with some abuse of notation).
In academics, the payoff to investment in the spot market setting, which will be explicitly stated later in the paper, is of the form
p Y (i) + (1 − p)α(η) − c(i + η) where i is the investment in academics and Y (. ), the expected second-period payoff given the choices of the other player, is linear in i. (The linearity follows from the assumptions made later in the paper.)
It is clear that if (1 − p)α ′(η) starts off higher than p Y ′(i) but crosses it at some value η A where \((1 - p)\alpha {(\eta }^{A}) > {c}^{{\prime}}{(\eta }^{A})\), then there will be some investment in industry and some in academics in the spot market by the university employee. It is also clear that \({\eta }^{A} {<\eta }^{{\ast}}\), so that the value of α(η A) is less than α. Therefore the possible investment in the academic option has decreased the outside option in industry.
We work with the simpler formulation in the rest of the paper.
- 9.
See the next subsection for a short discussion of possible contracts.
- 10.
This might seem odd – two successful faculty members are unable to obtain the benefits of their success, because neither has a relative advantage. Introducing more universities and more faculty members would increase the probability of at least one F realisation and hence some chance of bidding for the successful ones.
- 11.
If severance is not activated, presumably the employee will not seek an industry outside option and hence the true value of investment will not be available to the current employer, since the wage is pre-specified. If severance is activated, it has to be without this information.
- 12.
Of course, the condition is actually weaker. Namely, \((Y _{0} - Y _{j}) <\alpha i\).
- 13.
Since investment is lower with severance, it must be the case that \(w_{2b}^{sev} < w_{2b}^{FT}\).
- 14.
In the analysis, it will appear that the guaranteed wage is the important feature and not the guarantee of employment. However, this is not true, since in the spot market case, the wage is set by the employee’s outside option, which is what he would get if he turned down the contract and went into the market. Here the outside option is replaced by an “inside option” of \(w_{2}^{T}\).
- 15.
We are using p 2(S) in the calculations but p 1(S) would of course be identical given symmetry of beliefs.
- 16.
If the university has all the bargaining power then tenure and severance will produce identical investments. This is natural since the severance contract is set by the university at the beginning of period 1 when it has all the bargaining power. The crucial effect of tenure in this context is that it changes the bargaining power.
References
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Acknowledgements
The authors are indebted to Bill Samuelson for detailed editing that greatly improved the paper. The authors thank the Human Capital Foundation (http://www.hcfoundation.ru/en/), and especially Andrey Vavilov, for financial support. We thank Jordan Kurland of the AAUP as well as William Kovacic for helpful discussions. Professor Chatterjee thanks the American Philosophical Society for a sabbatical fellowship that provided financial support for this work and Churchill College, Cambridge for hosting him as an Overseas Fellow during the sabbatical period. We also thank the audiences at the various seminars where this paper has been presented for useful comments.
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Chatterjee, K., Marshall, R.C. (2014). A Game-Theoretic Model of Tenure. In: Chatterjee, K., Samuelson, W. (eds) Game Theory and Business Applications. International Series in Operations Research & Management Science, vol 194. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-7095-3_11
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